America’s Addiction To Debt Is Getting Scary

A report by the Federal Reserve Bank of New York shows Americans are taking on debt at scary new levels. Consumers were in the hole to the tune of $11.52 trillion dollars, a staggering number that is 65% of US GDP, a benchmark for the size of the entire economy, currently at $17.1 trillion dollars per year.

Wilbert van der Klaauw, senior economist at the New York Fed, had this to say, “This quarter is the first time since before the Great Recession that household debt has increased over its year-ago levels, suggesting that after a long period of deleveraging, households are borrowing again.”

US consumer debt increased in every category of consumer spending except home equity borrowing (HELOC), which was $34 billion lower than last year. Consumers added to their credit card balances by $11 billion dollars for the quarter, a level of spending not seen since 2007, before the Great Recession devastated credit markets.

Shockingly, America’s youth added another $53 billion in student loan debt, second only to new mortgage loans. Borrowers under age 30 showed the most optimism in the economy, borrowing the most for student loans and new cars, while the 30-49 age group were buying new homes. The only age group reducing their level of overall debt were those over 70.

70% of Americans believe debt is an unavoidable part of life.

If there’s a bright spot in the report, Americans are managing to make their payments on time, with late payments dropping from 4.3% to 3.4%, according to data published by Bankrate.com.

Make no mistake, the snapshot of consumer debt shows some disturbing trends. Nearly a third of Americans, 28%, have more credit card debt than savings. A full 64% of Americans are worried about the amount of debt they currently have on the books.

The state of consumer borrowing paints an ominous picture for the future of the economy. Much of the current spending, particularly on cars, represents pent-up demand as consumers delayed big ticket purchases until they felt better about the economy. The sudden surge of spending, and the sheer scale of debt in relation to GDP, are cause for concern when consumer spending represents two-thirds of the nation’s economy. You don’t have to be an economist to figure out that if there’s the slightest bump in the economic highway, consumers swamped with debt could suddenly reign in spending. If the consumer spending dries up, housing prices will almost certainly crater — along with the rest of the economy.

If this is all starting to sound familiar, that’s because it’s eerily similar to what we were facing in 2008; it’s the same song with a slightly different beat. While we’re not likely to see the credit markets freeze up like they did at the beginning of the Great Recession, it doesn’t matter if credit is available if there’s no one left to borrow the money.

Part of the reason consumer debt has been able to grow past two-thirds the size of the total economic output of the nation is that 70% of Americans believe debt is an unavoidable part of life. The perception of inevitability is, without a doubt, a contributing factor to the frightening levels of indebtedness we’re seeing today, particularly among young people.

For the 30% of us who do not see debt as either desirable or inevitable — those of us who live below our means, bank cash, maintain a fixed percentage of their wealth in hard assets like gold, and invest conservatively — it’s wise to guard against feeling too smug. It’s good to remember that the advantage of being debt free in a nation of debtors is a bit like being the cleanest shirt in the hamper; we’re all going get dirty, it’s just a matter of degrees.

If the economy tanks we’re all going to get dragged through the mud of recession and economic turmoil, regardless of the cause or who is at fault. As satisfying as it might seem to leave the less responsible among us to be swallowed up by their own poor decisions, the inescapable fact is we’re all in this economy together and there are no winners in a train wreck. In many ways the next recession could be worse than the last one, because borrowers have no way to discharge student loans; and we could be stuck with a whole new generation of borrowers saddled with underwater home values.

That kind of economic mud could keep us mired in stagnation for decades — and no one wins if that happens.

America’s Addiction To Debt Is Getting Scary was last modified: March 3rd, 2014 by Chris Poindexter

Chris Poindexter is a freelance journalist and photographer living in South Florida. He writes for a wide variety of publications on subjects including personal finance, investing, treasure hunting, travel, science and technology. He’s the author of several books, including the wildly popular My House Has Wheels, 10,000 Miles In Town and The Recovery and Marine Salvage, Inc. fiction series. He can be reached at chris@chrispoindexter.com.